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Why First Trust Internet Index Fund May Be The Next ETF To Breakout

|Includes:First Trust DJ Internet Index ETF (FDN), GOOG, LNKD, NFLX, YHOO

One ETF on our radar screen for potential buy entry right now is First Trust Internet Index ($FDN). Unlike many of the strongest ETFs in the market that are near-term extended to the upside, $FDN has not yet broken out above its range. As such, one could understandably argue that the ETF has relative weakness and should be avoided. In many cases, that would be true.

Even though $FDN has not yet broken out, the difference here is that the ETF has been forming a constructive base of consolidation at its all-time highs. This is much different than buying an ETF that is trading near its lows and is only now attempting to reverse its downtrend. The weekly chart of $FDN below shows how the ETF has been consolidating for the past few months:

(click to enlarge)Click to enlarge

On the week ending March 8, notice that $FDN attempted to break out to a new high, but failed the following week. When this happens to an ETF or stock that is trading near its highs, it does not necessarily mean the setup becomes invalid. On the contrary, some of the most explosive upside moves occur when the first breakout attempt fails, but the equity subsequently breaks out and hold. Often, failed breakouts at the highs simply indicate a lengthier period of base building is required.

Zooming into the shorter-term daily chart interval, notice that a rally above yesterday's (May 1) high would present a valid buy entry point for a partial position. Additional shares could be added to the position on confirmation of a breakout above the highs of the range:

(click to enlarge)Click to enlarge

Despite the major indices losing 0.9% yesterday, $FDN showed relative strength on the day by slipping just 0.5%. This was aided by shares of LinkedIn ($LNKD), which ignored the weakness in the broad market and climbed 1.4% to another fresh record high. $FDN is primarily comprised of mid to large-cap internet stocks like Google ($GOOG), Netflix ($NFLX), and Yahoo! ($YHOO), each of which are trading at or near their 52-week highs. Click here to see the current portfolio of stocks that comprise the portfolio of $FDN.

Speaking of internet stocks, our open position in $LNKD is now showing an unrealized gain of nearly 12% (20 points) since our April 9 buy entry. As we said in yesterday's The Wagner Daily, "$LNKD is scheduled to report earnings after the close on May 2, so if you are uncomfortable holding through earnings you should exit the position into strength ahead of the report (in today's session). Because we have a decent profit buffer we do not mind holding $LNKD through earnings." To further your trading education, check out how we traded around last quarter's $LNKD earnings report for a total gain of 22%.

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